The Financial Crisis: The Worst Is Yet To Come

The U.S. and other governments, along with pundits claim we are now in "Recovery," and the Recession is over. They're wrong, for as you'll see, the worst is yet to come. It's not necessary to agree with these predictions, but you ignore them at your peril.

Phase One, In the 1st phase of the Crisis, governments took over massive private defaulted debts so that the giant corporations that caused them wouldn't bear the losses. The sheer size of these corporate bailouts is the biggest in history. So is the magnitude of the fraud behind them, although no-one has been held accountable.

Phase Two, In the 2nd phase, these debts were too big for governments to absorb, so they borrowed and keep borrowing staggering sums of money from investors and from nations with very deep pockets such as China.

But these governments don't know how to repay these loans, or even how to pay the growing gargantuan interest charges. China figured this out and in December, sold a net $34.7 billion in U.S. government debt, and will try to sell more without panicking the market. Some other investors are also aware of this and as they get more nervous, it will be harder to sell government debt.

This situation is worse than you may think. We're all familiar with the stratospheric spending on bailouts and stimulus and in the U.S., on weapons and wars as well. But far less known is the stunning drop in tax revenues, for as people are thrown out of work and businesses shut down or downsize, they pay less or no taxes, which is why budget deficits are skyrocketing.

In the U.S., as this situation grows more desperate, there will be higher taxes: on salaries, certificates of deposit, business income and anything else that can be sold as "taxing the rich." But as we saw in the bailouts, the rich can afford lobbyists and pay relatively little taxes. That aside, no nation ever taxed its way to prosperity.

Phase Three. Greece introduced the Crisis' 3rd phase, as it is broke. In this phase, governments are now being pressured to bail out other governments. The European Union, most notably Germany, because it has the strongest European economy, is being asked to guarantee Greece's debts, something the German people oppose.

But to create the appearance of a Greek bailout, the European Union spoke of a rescue but offered no specifics. Based upon those verbal assurances, Greece just completed a $6.85 billion bond offering at a premium interest rate of 6.3%.

Unfortunately for Greece, this is a drop in the bucket compared to the hefty amount of money they must raise in the coming weeks and months. And interest costs on the current debt is already more than Greece spends on its schools, justice system and its police combined! If the European Union doesn't step up, Greece will find it nearly impossible to raise the funds it needs.

There is talk of the International Monetary Fund [IMF] rescuing Greece or of forming a European Bailout Fund to do it, but the Greek rescue won't happen for the IMF and Europe are a collective of nations, most with severe financial problems of their own.

In this 3rd phase, England, Portugal, Ireland, Italy, Spain and other deeply troubled nations will appeal for vast bailouts. But unless someone shows up from El Dorado, the legendary lost city of gold, there isn't nearly enough money to bail everyone out.

Phase Four: Financial Armageddon. To save your financial security and the value of your money, you must raise your voice now! Get rid of the bailouts and stimulus plans and in the U.S., end the wars and weapons development as well, while there is still time for fiscal sanity to prevail. Or brace yourself for the next Great Depression.

Dick [last updated on 3/11/10]
Note: If you think we can get out of this fiscal crisis by vast borrowing and spending, read a remarkable new book, "This Time Is Different: Eight Centuries of Financial Folly," by Carmen M. Reinhart, a University of Maryland economics professor and by Kenneth S. Rogoff, a Harvard economics professor, and you won't believe it for long.